Market Commentary 7th January 2025 – from Charlie Hancock

UK economic data was mixed. A Purchasing Managers’ Index (PMI) for the UK manufacturing sector declined to the lowest level in 11 months in December, with the sector experiencing a downturn during the month.

Mortgage lender Nationwide reported that house prices increased by 4.7% year-on-year in December, marking the fastest house price growth in over 2 years. The Bank of England (BoE) reported that mortgage approvals remained above their 12-month average in November, suggesting that housing market activity was relatively stable.

Inflation data appeared to prompt some concerns amongst investors in the Eurozone. Spain reported that consumer price inflation was 2.8% year-on-year in December, accelerating from the 2.4% recorded for November. The stronger than expected inflation figures prompted calls for the European Central Bank (ECB) to take a cautious approach regarding further interest rate cuts.

Senior officials at the ECB made some hawkish remarks last week. Robert Holzmann, the governor of Austria’s central bank, stated that policymakers could take more time before cutting interest rates again, citing concerns around rising energy prices and the impact of potential US trade tariffs.

PMI data for the manufacturing sector in the Chicago region prompted some concerns amongst economists last week. The data pointed to a relatively severe contraction in business activity during December. The Atlanta Fed also lowered their 2024 fourth quarter economic growth estimate, citing weaker business investment.

The labour market appeared to remain relatively stable last month. Initial jobless claims declined in the final week of December to the lowest level recorded in 8 months. Continuing unemployment claims declined to a 3-month low.

Weak economic data appeared to dent investor sentiment on China. A manufacturing PMI came in weaker than expected for December, with the sector flatlining. A services PMI came in better than expected, with the sector experiencing an increase in activity during the month, however, the data still prompted concerns about the effectiveness of stimulus efforts in China.

PMI data in Japan showed that the manufacturing sector shrank for the sixth consecutive month, however, the decline in December was shallower than November’s decline, adding to hopes that the Japanese economy will continue to expand in 2025. The PMI data showed firms reported relatively strong price increases, which added to expectations for the Bank of Japan (BoJ) to implement an interest rate hike in the coming months.

Investors continued to debate the outlook for UK interest rates in 2025 following the BoE’s decision to keep interest rates on hold after their December policy meeting.

Hawkish comments from ECB officials and the higher than expected inflation print in Spain appeared to contribute to Eurozone government bond yields rising.

Some weaker than expected US economic data appeared to add some downward pressure to Treasury yields, with the rise experienced in recent months appearing to stall last week.

GBP / EUR – Current 1.2054 Previous 1.2064

The Pound declined by 1.23% against the US Dollar last week, with the greenback strengthening against most major currencies. Against the Euro, the Pound was broadly flat (-0.08%).